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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 1997 Commission file number 0-19649
Checkers Drive-In Restaurants, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 58-1654960
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
600 Cleveland Street, Eighth Floor
Clearwater, Florida 33755
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (813) 441-3500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on March 16, 1998, was $54,260,752 based upon the reported
closing sale price of such shares on the Nasdaq Stock Market's National Market
for that date. As of March 16, 1998, there were 73,406,112 common shares
outstanding.
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
This document, including exhibits, contains 83 pages. The exhibit index is
located on page 58.
CHECKERS DRIVE-IN RESTAURANTS, INC.
1997 Form 10-K Annual Report
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TABLE OF CONTENTS
PART I
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ITEM 1. BUSINESS.................................................................................................. 3
ITEM 2. PROPERTIES................................................................................................ 12
ITEM 3. LEGAL PROCEEDINGS......................................................................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................................... 14
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS................................................................................................... 14
ITEM 6. SELECTED FINANCIAL DATA................................................................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................................................... 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................ 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................... 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...................................................................................... 52
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................................ 52
ITEM 11. EXECUTIVE COMPENSATION.................................................................................... 52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................ 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................ 52
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.......................................... 53
2
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K under "Item 1. Business," "Item 3. Legal
Proceedings," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Securities Act of 1933
and the Securities Exchange Act of 1934. Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance, or achievements of Checkers Drive-In Restaurants,
Inc. ("Checkers" and collectively with its subsidiaries and various joint
venture partnerships controlled by Checkers, the "Company") to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: general economic and business conditions; the impact of
competitive products and pricing; success of operating initiatives; development
and operating costs; advertising and promotional efforts; adverse publicity;
acceptance of new product offerings; consumer trial and frequency; availability,
locations, and terms of sites for restaurant development; changes in business
strategy or development plans; quality of management; availability, terms and
deployment of capital; the results of financing efforts; business abilities and
judgment of personnel; availability of qualified personnel; food, labor and
employee benefit costs; changes in, or the failure to comply with, government
regulations; weather conditions; construction schedules; and other factors
referenced in this Form 10-K.
ITEM 1. BUSINESS.
Introduction
Unless the context requires otherwise, references in this
Report to the "Company" or the "Registrant" means Checkers Drive-In Restaurants,
Inc., its wholly-owned subsidiaries and the 10.55% to 65.83% owned joint venture
partnerships controlled by the Company.
The Company develops, produces, owns, operates and franchises
quick-service "double drive-thru" restaurants under the name "Checkers(R)" (the
"Restaurants"). The Restaurants are designed to provide fast and efficient
automobile-oriented service incorporating a 1950's diner and art deco theme with
a highly visible, distinctive and uniform look that is intended to appeal to
customers of all ages. The Restaurants feature a limited menu of high quality
hamburgers, cheeseburgers and bacon cheeseburgers, specially seasoned french
fries, hot dogs, and chicken sandwiches, as well as related items such as soft
drinks and old fashioned premium milk shakes.
As of December 29, 1997, there were 479 Restaurants operating
in the States of Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Iowa,
Kansas, Louisiana, Maryland, Michigan, Mississippi, Missouri, New Jersey, New
York, North Carolina, Pennsylvania, South Carolina, Tennessee, Texas, Virginia,
West Virginia, Wisconsin, Washington D.C., in Puerto Rico and West Bank, Israel
(230 Company-operated (including 12 joint ventured) and 249 franchised).
As of January 1, 1994, the Company changed from a calendar
reporting year ending on December 31st to a fiscal year which will generally end
on the Monday closest to December 31st. Each quarter consists of three 4-week
periods, with the exception of the fourth quarter which consists of four 4-week
periods.
Recent Developments
Effective November 30, 1997, the Company entered into a
management services agreement with Rally's Hamburgers, Inc. ("Rally's") pursuant
to which the Company is providing key services to Rally's, including executive
management, financial planning and accounting, franchise administration,
purchasing and human resources. In addition, the Company and Rally's share
certain of their executive officers, including the Chief Executive Officer and
the Chief Operating Officer. Management believes that entering into the
management services agreement and sharing certain executive officers will enable
the Company and Rally's to take advantage of cost saving opportunities by
facilitating the combination of administrative and operational functions. See
"Item 7. Managements's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 5 to the Consolidated Financial Statements set
forth under "Item 8. Consolidated Financial Statements and Supplementary Data".
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On December 18, 1997, Rally's acquired approximately 19.1
million shares of the Company's Common Stock pursuant to that certain Exchange
Agreement, dated as of December 8, 1997 (the "Exchange Agreement"), between
Rally's, CKE Restaurants, Inc., Fidelity National Financial, Inc., GIANT GROUP,
LTD., and other parties named in the Exchange Agreement. Rally's owns, operates
and franchises approximately 477 double drive-thru restaurants primarily in the
Midwest and the Sunbelt.
Restaurant Development and Acquisition Activities
During 1997, the Company opened one Restaurant, acquired or
leased five Restaurants from franchisees, leased one Restaurant to a franchisee
and closed seven Restaurants for a net reduction of two Company-operated
Restaurants in 1997. Franchisees opened 24 Restaurants, leased one Restaurant
from the Company, sold or transferred five Restaurants to the Company and closed
16 Restaurants for a net increase of three franchisee-operated Restaurants in
1997.
During 1997, the Company focused its efforts on existing
operating markets of highest market penetration ("Core Markets"). It is the
Company's intent in the future to continue that focus and to grow only in its
Core Markets through acquisitions, new Restaurant openings or through other
growth opportunities. The Company will continue to seek to expand through
existing and new franchisees. From time to time, the Company may close or sell
additional Restaurants when determined by management and the Board of Directors
to be in the best interests of the Company.
Franchisees operated 249, or 52%, of the total Restaurants
open at December 29, 1997. The Company's long-term strategy is for 60% to 65% of
its Restaurants to be operated by franchisees. Because of the Company's limited
capital resources, it will rely on franchisees for a larger portion of chain
expansion to continue market penetration. The inability for franchisees to
obtain sufficient financing capital on a timely basis may have a materially
adverse effect on expansion efforts.
Restaurant Operations
Concept. The Company's operating concept includes: (i)
offering a limited menu to permit the maximum attention to quality and speed of
preparation; (ii) utilizing a distinctive Restaurant design that features a
"double drive-thru" concept, projects a uniform image and creates significant
curb appeal; (iii) providing fast service using a "double drive-thru" design for
its Restaurants and a computerized point-of-sale system that expedites the
ordering and preparation process; and (iv) great tasting quality food and drinks
at a fair price.
Restaurant Locations. As of December 29, 1997, there were 230
Restaurants owned and operated by the Company in 11 states and the District of
Columbia (including 14 Restaurants owned by partnerships in which the Company
has interests ranging from 10.55% to 65.83%) and 249 Restaurants operated by the
Company's franchisees in 24 States, the District of Columbia , Puerto Rico and
West Bank, Israel. The following table sets forth the locations of such
Restaurants.
Company-operated
(230 Restaurants)
Florida(135) Missouri(5) Kansas(2)
Georgia(37) Mississippi(5) Delaware (1)
Pennsylvania(13) Tennessee(5) New Jersey (4)
Alabama(12)
Illinois (11)
Franchised
(249 Restaurants)
Florida(55) Texas(4) New York(6)
Illinois(24) New Jersey(10) Puerto Rico(6)
Georgia(48) Tennessee(5) West Virginia(2)
Alabama(20) Virginia(4) Missouri(2)
North Carolina(14) Wisconsin (4) Iowa(2)
South Carolina(9) Indiana(3) Mississippi(1)
Maryland(15) Michigan(3) Washington D.C.(2)
Louisana(9) West Bank, Israel(1)
Of these Restaurants, 25 were opened in 1997 (one Company-operated and 24
franchised), two of which
4
included fully equipped manufactured modular buildings, "Modular Restaurant
Packages" ("MRP's"), produced by the Company and 14 of which included MRP's
which were relocated from closed sites. The Company currently expects
approximately 30 additional Restaurants to be opened in 1998 primarily by
franchisees with substantially all of these Restaurants to include MRP's
relocated from closed sites. If either the Company or the franchisee(s) are
unable to obtain sufficient capital on a timely basis, the Company's ability to
achieve its 1998 expansion plans may be materially adversely affected. The
Company's growth strategy for the next two years is to focus on the controlled
development of additional franchised and Company-operated Restaurants primarily
in its existing Core Markets and to further penetrate markets currently under
development by franchisees, including select international markets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Site Selection. The Company believes that the location of a
Restaurant is critical to its success. Management inspects and approves each
potential Restaurant site prior to final selection of the site. In evaluating
particular sites, the Company considers various factors including traffic count,
speed of traffic, convenience of access, size and configuration, demographics
and density of population, visibility and cost. The Company also reviews
competition and the sales and traffic counts of national and regional chain
Restaurants operating in the area. Approximately 84% of Company-operated
Restaurants are located on leased land and the Company intends to continue to
use leased sites where possible. The Company believes that the use of the
Modular Restaurant Package provides the Company and its franchisees with
additional flexibility in the size, control and location of sites.
Restaurant Design and Service. The Restaurants are built to
Company-approved specifications as to size, interior and exterior decor,
equipment, fixtures, furnishings, signs, parking and site improvements. The
Restaurants have a highly visible, distinctive and uniform look that is intended
to appeal to customers of all ages. The Restaurants are less than one-fourth the
size of the typical Restaurants of the four largest fast food hamburger chains
(generally 760 to 980 sq. ft.) and require approximately one-third to one-half
the land area (approximately 18,000 to 25,000 square feet). Substantially all of
the Restaurants in operation consist of MRP's produced and installed by the
Company. Prior to February 15, 1994, the MRP's were produced and installed by
Champion Modular Restaurant Company, Inc., a Florida corporation ("Champion")
and wholly-owned subsidiary of the Company. Champion was merged with and into
the Company effective February 15, 1994. During periods when the Champion
construction facility is operating at an efficient production level, the Company
believes that utilization of a modular Restaurant building generally costs less
than comparably built Restaurants using conventional, on-site construction
methods. See discussion under "Restaurant Development Cost" below.
The Company's standard Restaurant is designed around a 1950's
diner and art deco theme with the use of white and black tile in a checkerboard
motif, glass block corners, a protective drive-thru cover on each side of the
Restaurant supported by red aluminum columns piped with white neon lights and a
wide stainless steel band piped with red neon lights that wraps around the
Restaurant as part of the exterior decor. Most Restaurants utilize a "double
drive-thru" concept that permits simultaneous service of two automobiles from
opposite sides of the Restaurant. Although a substantial proportion of the
Company's sales are made through its drive-thru windows, service is also
available through walk-up windows. While the Restaurants normally do not have an
interior dining area, most have parking and a patio for outdoor eating. The
patios contain canopy tables and benches, are well landscaped and have outside
music in order to create an attractive and "fun" eating experience. Although
each sandwich is made-to-order, the Company's objective is to serve customers
within 30 seconds of their arrival at the drive-thru window. Each Restaurant has
a computerized point-of-sale system which displays each individual item ordered
on a monitor in front of the food and drink preparers. This enables the
preparers to begin filling an order before the order is completed and totaled
and thereby increases the speed of service to the customer and the opportunity
of increasing sales per hour, provides better inventory and labor costs control
and permits the monitoring of sales volumes and product utilization. The
Restaurants are generally open from 12 to 15 hours per day, seven days a week,
for lunch, dinner and late-night snacks and meals.
Restaurant Development Costs. During the fiscal years ended
December 29, 1997 and December 30, 1996 the average cost of opening a
Company-operated Restaurant (exclusive of land costs) utilizing MRP's was
$375,000 which included modular building costs, fixtures, equipment and signage
costs, site improvement costs and various soft costs (e.g., engineering and
permit fees). This average dropped 11.6% from 1995 due to the availability and
use of used MRP's in 1996 and 1997. Future costs, after all remaining used MRP's
are relocated, may be more consistent with that of prior years. During 1996 and
1997, there were no land acquisitions. During periods when the Champion
construction facility is operating at an efficient production level, the Company
believes that utilization of MRP's generally costs less than comparably built
Restaurants using conventional, on-site construction methods. The Company
believes it is even more cost effective to utilize used MRP's when available. At
such time as there are no longer used MRP's available, but demand for new MRP's
is not sufficient to allow the Champion construction facility to operate at an
efficient level, it may become more cost effective to seek other manufacturers
of
5
MRP's or to build restaurants utilizing conventional, on site construction
methods.
Menu. The menu of a Restaurant includes hamburgers,
cheeseburgers and bacon cheeseburgers, chicken, grilled chicken, hot dogs and
deluxe chili dogs and specially seasoned french fries, as well as related items
such as soft drinks, old fashioned premium milk shakes and apple nuggets. The
menu is designed to present a limited number of selections to permit the
greatest attention to quality, taste and speed of service. The Company is
engaged in product development research and seeks to enhance the variety offered
to consumers from time to time without substantially expanding the limited menu.
In 1996, the Company and various franchise restaurants conducted a test of the
Company's proprietary L.A. Mex mexican brand. The Company decided to discontinue
the test in 1997.
Supplies. The Company and its franchisees purchase their food,
beverages and supplies from Company-approved suppliers. All products must meet
standards and specifications set by the Company. Management constantly monitors
the quality of the food, beverages and supplies provided to the Restaurants. The
Company has been successful in negotiating price concessions from suppliers for
bulk purchases of food and paper supplies by the Restaurants. The Company
believes that its continued efforts over time have achieved cost savings,
improved food quality and consistency and helped decrease volatility of food and
supply costs for the Restaurants. All essential food and beverage products are
available or, upon short notice, could be made available from alternate
qualified suppliers. Among other factors, the Company's profitability is
depended upon its ability to anticipate and react to changes in food costs.
Various factors beyond the Company's control, such as climate changes and
adverse weather conditions, may affect food costs.
Management and Employees. Each Company-operated Restaurant
employs an average of approximately 20 hourly employees, many of whom work
part-time on various shifts. The management staff of a typical Restaurant
operated by the Company consists of a general manager, one assistant manager and
a shift manager. The Company has an incentive compensation program for store
managers that provides the store managers with a quarterly bonus based upon the
achievement of certain defined goals. A Restaurant general manager is generally
required to have prior Restaurant management experience, preferably within the
fast food industry, and reports directly to a market manager. The market manager
typically has responsibility for eight to twelve Restaurants.
Supervision and Training. The Company requires each franchisee
and Restaurant manager to attend a comprehensive training program of both
classroom and in-store training. The program was developed by the Company to
enhance consistency of Restaurant operations and is considered by management as
an important step in operating a successful Restaurant. During this program, the
attendees are taught certain basic elements that the Company believes are vital
to the Company's operations and are provided with a complete operations manual,
together with training aids designed as references to guide and assist in the
day-to-day operations. In addition, hands-on experience is incorporated into the
program by requiring each attendee, prior to completion of the training course,
to work in and eventually manage an existing Company-operated Restaurant. After
a Restaurant is opened, the Company continues to monitor the operations of both
franchised and Company-operated Restaurants to assist in the consistency and
uniformity of operation.
Advertising and Promotion. The Company communicates with its
customers by employing a consistent and enticing approach to advertising and
promoting its products. Using television and radio commercials where efficient
and practical, as well as outdoor billboards and direct mail print advertising
in less densely penetrated markets, the Company informs the public about their
brand position and promotional product opportunities. When the customers arrive
at the restaurant, they are exposed to readerboard messages, pole banners,
menuboards, and value oriented extender cards, all of which work together to
present a simple, unified and coherent selling message at the time they are
making their purchase decisions. As of December 29, 1997, the Company and its
franchisees were working together in four advertising co-ops covering 186
restaurants. The Company requires franchisees to spend a minimum of 4% of gross
sales to promote their restaurants, which includes a combination of local store
marketing and co-op advertising. In addition, each Company and franchise
restaurant contributes to a National Production Fund that provides broadcast
creative and point of purchase material production for each promotion. Ongoing
consumer research is employed to track attitudes, brand awareness, and market
share of not only Checkers' customers, but also of its major competitor's
customers as well. In addition, customer focus groups and sensory panels are
conducted in the Company's core markets to provide both qualitative and
quantitative data. This research data is vital in creating a better
understanding of the Company's short and long term marketing strategies.
Brand Positioning: The Best Burger: The Company is in the process of
establishing an overall brand positioning as serving the BEST hamburger
in the fast food industry. This position will be supported by:
A. A limited menu of the highest quality hamburgers/
cheeseburgers, chicken sandwiches, seasoned French
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fries, soft drinks and milk shakes, all deliverable in a
double drive through format.
B. A new, creative positioning has been established. "Fresh.
Because we just made it.", allows the Company to take
advantage of the consumers' understanding that their food has
been freshly prepared, not retrieved from under a heat lamp or
microwave oven and given to them.
C. Television, radio, outdoor and direct mail print advertising
designed to differentiate the Company from other fast food
hamburger chains and to target heavy hamburger users.
The new brand positioning has been developed through extensive
research with the core user of the Company's products, as well as other fast
food hamburger users who might be convinced to become a loyal user. The long
range benefit of such a positioning is believed to help the Company compete more
favorably in an environment where quality and taste is much more difficult to
deliver on a consistent basis by the major fast food competitors, given the
operating systems of those competitors. Although good value and fast service are
still important to consumers, the competitive environment has remained so price
oriented in the past few years, that the Company's competitive advantage has
been seriously eroded. Further, the over reliance on price has placed immense
pressure on margins, as food, labor and other costs have continued to rise,
while the Company's ability to raise prices in the aforementioned competitive
climate has been restricted.
With a focus on a brand positioning that provides consumers
what they say they want from a fast food hamburger chain--quality hamburgers,
served quickly at a reasonable price--the Company believes it can begin to break
the cycle of low price only promotions, differentiate itself from its
competitors and improve sales and guest count trends over time.
Restaurant Reporting. Each Company-operated Restaurant has a
computerized point-of-sale system coupled with a back office computer. With this
system, management is able to monitor sales, labor and food costs, customer
counts and other pertinent information. This information allows management to
better control labor utilization, inventories and operating costs. Each system
at Company-operated Restaurants is polled daily by a computer at the principal
offices of the Company.
Year 2000 Issues. Many computer systems using two-digit fields
to store years must be converted to read four-digit fields before the turn of
the century in order to recognize the difference between the years 1900 and
2000. All major software systems of the Company are either in compliance with
the Year 2000 or upgraded software packages are scheduled to be installed to
meet that requirement. As a result, the Company expects these upgrades to cost
approximately $100,000 and believes the Year 2000 will not have a negative
effect on any major business process.
Joint Venture Restaurants. As of December 29, 1997, there were
12 Restaurants owned by 10 separate general and limited partnerships in which
the Company owns general and limited partnership interests ranging from 10.55%
to 65.83%, with other parties owning the remaining interests (the "Joint Venture
Restaurants"). The Company is the managing partner of 11 of the 12 Joint Venture
Restaurants. In all 12 Joint Venture Restaurants the Company receives a fee for
management services of 1% to 2.5% of gross sales. In addition, all of the Joint
Venture Restaurants pay the standard royalty fee of 4% of gross sales. The
agreements for four of the Joint Venture Restaurants (excluding Illinois
partnerships) in which the Company is the managing partner are terminable
through a procedure whereby the initiating party sets a price for the interest
in the joint venture and the other party must elect either to sell its interest
in the joint venture or purchase the initiating party's interest at such price.
Some, but not all of the partnership agreements also contain the right of the
partnership to acquire a deceased individual partner's interest at the fair
market value thereof based upon a defined formula set forth in the agreement.
None of these partnerships have been granted area development agreements.
Inflation. The Company does not believe inflation has had a
material impact on earnings during the past three years. Substantial increases
in costs could have a significant impact on the Company and the industry. If
operating expenses increase, management believes it can recover increased costs
by increasing prices to the extent deemed advisable considering competition.
Seasonality. The seasonality of Restaurant sales due to
consumer spending habits can be significantly affected by the timing of
advertising, competitive market conditions and weather related events. While
Restaurant sales for certain quarters can be stronger, or weaker, there is no
predominant pattern.
Franchise Operations
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Strategy. In addition to the acquisition and development of
additional Company-operated Restaurants, the Company encourages controlled
development of franchised Restaurants in its existing markets as well as in
certain additional states. The primary criteria considered by the Company in the
selection, review and approval of prospective franchisees are the availability
of adequate capital to open and operate the number of Restaurants franchised and
prior experience in operating fast food Restaurants. Franchisees operated 249,
or 52%, of the total Restaurants open at December 29, 1997. The Company has
acquired and sold, and may in the future acquire or sell, Restaurants from and
to franchisees when the Company believes it to be in its best interests to do
so. In the future, the Company's success will continue to be dependent upon its
franchisees and the manner in which they operate and develop their Restaurants
to promote and develop the Checkers concept and its reputation for quality and
speed of service. Although the Company has established criteria to evaluate
prospective franchisees, there can be no assurance that franchisees will have
the business abilities or access to financial resources necessary to open the
number of Restaurants the franchisees currently anticipate to be opened in 1998
or that the franchisees will successfully develop or operate Restaurants in
their franchise areas in a manner consistent with the Company's concepts and
standards.
As a result of inquiries concerning international development,
the Company may develop a limited number of international markets and has begun
the process of registering its trademarks in various foreign countries. The most
likely format for international development is through the issuance of master
franchise agreements and/or joint venture agreements. The terms and conditions
of these agreements may vary from the standard Area Development Agreement and
Franchise Agreement in order to comply with laws and customs different from
those of the United States. The Company has entered into a master Franchise
Agreement for the Caribbean Basin and has granted a single franchise agreement
for the West Bank in Palestine.
Franchisee Support Services. The Company maintains a staff of
well-trained and experienced Restaurant operations personnel whose primary
responsibilities are to help train and assist franchisees in opening new
Restaurants and to monitor the operations of existing Restaurants. These
services are provided as part of the Company's franchise program. Upon the
opening of a new franchised Restaurant by a new franchisee, the Company
typically sends a Restaurant team to the Restaurant to assist the franchisee
during the first four days that the Restaurant is open. This team works in the
Restaurant to monitor compliance with the Company's standards as to quality of
product and speed of service. In addition, the team provides on-site training of
all Restaurant personnel. This training is in addition to the training provided
to the franchisee and the franchisee's management team described under
"Restaurant Operations - Supervision and Training" above. The Company also
employs Franchise Business Consultants ("FBCs"), who have been fully trained by
the Company to assist franchisees in implementing the operating procedures and
policies of the Company once a Restaurant is open. As part of these services,
the FBC rates the Restaurant's hospitality, food quality, speed of service,
cleanliness and maintenance of facilities. The franchisees receive a written
report of the FBC's findings and, if any deficiencies are noted, recommended
procedures to correct such deficiencies.
The Company also provides site development and construction
support services to its franchisees. All sites and site plans are submitted to
the Company for its review prior to construction. These plans include
information detailing building location, internal traffic patterns and curb
cuts, location of utilities, walkways, driveways, signs and parking lots and a
complete landscape plan. The Company's construction personnel also visit the
site at least once during construction to meet with the franchisee's site
contractor and to review construction standards.
Franchise Agreements. The Unit Franchise Agreement grants to
the franchisee an exclusive license at a specified location to operate a
Restaurant in accordance with the Checkers(R) system and to utilize the
Company's trademarks, service marks and other rights of the Company relating to
the sale of its menu items. The term of the current Unit Franchise Agreement is
generally 20 years. Upon expiration of a Unit Franchise Agreement, the
franchisee will be entitled to acquire a successor franchise for the Restaurants
on the terms and conditions of the Company's then current form of Unit Franchise
Agreement if the franchisee remains in compliance with the Unit Franchise
Agreement throughout its term and if certain other conditions are met (including
the payment of a $6,000 renewal fee equal to 50% of the then current franchise
fee).
In some instances, the Company grants to the franchisee the
right to develop and open a specified number of Restaurants within a limited
period of time and in a defined geographic area (the "Franchised Area") and
thereafter to operate each Restaurant in accordance with the terms and
conditions of a Unit Franchise Agreement. In that event, the franchisee
ordinarily signs two agreements, an Area Development Agreement and a Unit
Franchise Agreement. Each Area Development Agreement establishes the number of
Restaurants the franchisee is to construct and open in the Franchised Area
during the term of the Area Development Agreement (normally a maximum of five
Restaurants) after considering many factors, including the residential,
commercial and industrial characteristics of the area, geographic factors,
population of the area and the previous
8
experience of the franchisee. The franchisee's development schedule for the
Restaurants is set forth in the Area Development Agreement. Of the 249
franchised Restaurants at December 29, 1997, 232 were being operated by multiple
unit operators and 17 were being operated by single unit operators. The Company
may terminate the Area Development Agreement of any franchisee that fails to
meet its development schedule.
The Unit Franchise Agreement and Area Development Agreement
require that the franchisee select proposed sites for Restaurants within the
Franchised Area and submit information regarding such sites to the Company for
its review, although final site selection is at the discretion of the
franchisee. The Company does not arrange or make any provisions for financing
the development of Restaurants by its franchisees. To the extent new or used
MRP's are available for sale, and/or to the extent that the Company deems it
feasible to begin constructing new MRP's again in the Champion construction
facility, the Company will offer the franchisees an opportunity to buy a Modular
Restaurant Package from the Company in those geographic areas where the Modular
Restaurant Package can be installed in compliance with applicable laws. Each
franchisee is required to purchase all fixtures, equipment, inventory, products,
ingredients, materials and other supplies used in the operation of its
Restaurants from approved suppliers, all in accordance with the Company's
specifications. The Company provides a training program for management personnel
of its franchisees at its corporate offices. Under the terms of the Unit
Franchise Agreement, the Company has adopted standards of quality, service and
food preparation for franchised Restaurants. Each franchisee is required to
comply with all of the standards for Restaurant operations as published from
time to time in the Company's operations manual.
The Company may terminate a Unit Franchise Agreement for
several reasons including the franchisee's bankruptcy or insolvency, default in
the payment of indebtedness to the Company or suppliers, failure to maintain
standards set forth in the Unit Franchise Agreement or operations manual,
material continued violation of any safety, health or sanitation law, ordinance
or governmental rule or regulation or cessation of business. In such event, the
Company may also elect to terminate the franchisee's Area Development Agreement.
Franchise Fees and Royalties. Under the current Unit Franchise
Agreement, a franchisee is generally required to pay application fees, site
approval fees and an initial Franchise Fee together totaling $30,000 for each
Restaurant opened by the franchisee. If a franchisee is awarded the right to
develop an area pursuant to an Area Development Agreement, the franchisee
typically pays the Company a $5,000 Development Fee per store which will be
applied to the Franchisee Fee as each Restaurant is developed. Each franchisee
is also generally required to pay the Company a semi-monthly royalty of 4% of
the Restaurant's gross sales (as defined) and to expend certain amounts for
advertising and promotion
Manufacturing Operations
Strategy. Although the Company does not believe that the use
of MRP's is critical to the success of any individual restaurant or the Company
in general, the Company believes that the integration of its Restaurant
operations with its production of Modular Restaurant Packages for use by the
Company and sale to its franchisees provides it with a competitive advantage
over other fast food companies that use conventional, on-site construction
methods. These advantages include more efficient construction time, direct
control of the quality, consistency and uniformity of the Restaurant image as
well as having standard Restaurant operating systems. In addition, the Company
believes the ability to relocate a Modular Restaurant Package provides greater
economies and flexibility than alternative methods. The cost and construction
time effeciencies may be significantly impacted by the Company's decision
whether or not to resume construction of MRP's at its Champion construction
facility. Due to the number of Modular Restaurant Packages currently available
for relocation from closed Restaurant sites, it is not anticipated that any
significant new construction of Modular Restaurant Packages will occur during
fiscal year 1998. In the short term, the Company's construction facility located
in Largo, Florida will be utilized to store and refurbish used Modular
Restaurant Packages for sale to franchisees or others and use by the Company.
The Company is evaluating other options in relation to the future use of this
facility, which could include generating other outside business, leasing the
facility or an eventual sale of the facility. Operation of the construction
facility consists of five personnel, and substantially all of the labor in the
manufacturing and refurbishment process is done through independent contractors,
the number of which may be increased or decreased with demand.
Construction. The Champion construction facility is designed
to produce a complete Modular Restaurant Package ready for delivery and
installation at a Restaurant site. When the Champion construction is fully
operational the Modular Restaurant Packages are built and refurbished using
assembly line techniques and a fully integrated and complete production system.
Each Modular Restaurant Package consists of a modular building complete with all
mechanical, electrical and plumbing systems (except roof top systems which are
installed at the site), along with all Restaurant equipment. The modular
building is a complete operating Restaurant when sited, attached to its
foundation and all utilities are connected. All
9
Modular Restaurant Packages are constructed in accordance with plans and
specifications approved by the appropriate governmental agencies and are
typically available in approximately eight (8) weeks after an executed
agreement.
Capacity. As of December 29, 1997, the Company had five (5)
substantially completed new Modular Restaurant Packages in inventory, one of
which is under contract for sale to a franchisee. As of December 29, 1997, the
Company had thirty-five (35) used Modular Restaurant Packages available for
relocation to new sites, eight (8) of which have been moved to the Champion
production facility for refurbishment, and twenty-seven (27) of which are at
closed sites. Although the Company does not require a franchisee to use a
Modular Restaurant Package, because of the expected benefits associated
therewith, the Company anticipates that substantially all of the Restaurants
developed by it or its franchisees in the immediate future will include Modular
Restaurant Packages produced by the Company, or relocated from other sites.
Modular Restaurant Packages from closed sites are being marketed at various
prices depending upon age and condition.
Transportation and Installation of Modular Restaurant
Packages. Once all site work has been completed to the satisfaction of the
Company and all necessary governmental approvals have been obtained for
installation of the Modular Restaurant, the Modular Restaurant Package is
transported to such site by an independent trucking contractor. All
transportation costs are charged to the customer. Once on the site, the Modular
Restaurant Package is installed by independent contractors hired by the Company
or franchisee, in accordance with procedures specified by the Company. The
Company's personnel inspect all mechanical, plumbing and electrical systems to
make sure they are in good working order, and inspect and approve all site
improvements on new Modular Restaurant Packages sold by the Company. Used
Modular Restaurant Packages are typically sold without warranties. Once a
Modular Restaurant Package has been delivered to a site, it takes generally
three (3) to four (4) weeks before the Restaurant is in full operation.
Competition
The Company's Restaurant operations compete in the fast food
industry, which is highly competitive with respect to price, concept, quality
and speed of service, Restaurant location, attractiveness of facilities,
customer recognition, convenience and food quality and variety. The industry
includes many fast food chains, including national chains which have
significantly greater resources than the Company that can be devoted to
advertising, product development and new Restaurants. In certain markets, the
Company will also compete with other quick-service double drive-thru hamburger
chains with operating concepts similar to the Company. The fast food industry is
often significantly affected by many factors, including changes in local,
regional or national economic conditions affecting consumer spending habits,
demographic trends and traffic patterns, changes in consumer taste, consumer
concerns about the nutritional quality of quick-service food and increases in
the number, type and location of competing quick-service Restaurants. The
Company competes primarily on the basis of speed of service, price, value, food
quality and taste. In addition, with respect to selling franchises, the Company
competes with many franchisors of Restaurants and other business concepts. All
of the major chains have increasingly offered selected food items and
combination meals, including hamburgers, at temporarily or permanently
discounted prices. Beginning generally in the summer of 1993, the major fast
food hamburger chains began to intensify the promotion of value priced meals,
many specifically targeting the 99(cent) price point at which the Company sells
its quarter pound "Champ Burger(R)". This promotional activity has continued at
increasing levels, and management believes that it has had a negative impact on
the Company's sales and earnings. Increased competition, additional discounting
and changes in marketing strategies by one or more of these competitors could
have an adverse effect on the Company's sales and earnings in the affected
markets.
With respect to its Modular Restaurant Packages, the Company
competes primarily on the basis of price and speed of construction with other
modular construction companies as well as traditional construction companies,
many of which have significantly greater resources than the Company. When the
inventory of new and used MRP's is depleted, there is no assurance that the
Company will again initiate new construction at its Champion construction
facility thereby requiring the Company and its franchisees to purchase MRP's
from other modular construction companies or to utilize conventional
construction methods.
Employees
Effective November 30, 1997, the Company entered into a
Management Services Agreement, pursuant to which Rally's Hamburgers, Inc.,
("Rally's") will be managed and operated predominantly by the corporate
management of the Company. Rally's, together with its franchisees, operates
approximately 477 double drive-thru hamburger restaurants primarily in the
Midwest and Sunbelt. In addition, the Company and Rally's share certain of their
executive officers, including the Chief Executive Officer and the Chief
Operating Officer.
10
As of December 29, 1997, the Company employed approximately
5,000 persons in its Restaurant operations, approximately 800 of whom are
Restaurant management and supervisory personnel and the remainder of whom are
hourly Restaurant personnel. Of the approximately 165 corporate employees, five
are involved in the manufacturing operation, approximately nine are in upper
management positions and the remainder are professional and administrative or
office employees.
The Company considers its employee relations to be good. Most
employees, other than management and corporate personnel, are paid on an hourly
basis. The Company believes that it provides working conditions and wages that
compare favorably with those of its competition. None of the Company's employees
is covered by a collective bargaining agreement.
Trademarks and Service Marks
The Company believes its trademarks and service marks have
significant value and are important to its marketing efforts. The Company has
registered certain trademarks and service marks (including the name "Checkers",
"Checkers BurgersoFriesoColas" and "Champ Burger" and the design of the
Restaurant building) in the United States Patent and Trademark office. The
Company has also registered the service mark "Checkers" individually and/or with
a rectangular checkerboard logo of contiguous alternating colors to be used with
Restaurant services in the states where it presently does, or anticipates doing,
business. The Company has various other trademark and service mark registration
applications pending. It is the Company's policy to pursue registration of its
marks whenever possible and to oppose any infringement of its marks.
Government Regulations
The restaurant industry generally, and each Company-operated
and franchised Restaurant specifically, are subject to numerous federal, state
and local government regulations, including those relating to the preparation
and sale of food and those relating to building, zoning, health, accommodations
for disabled members of the public, sanitation, safety, fire, environmental and
land use requirements. The Company and its franchisees are also subject to laws
governing their relationship with employees, including minimum wage
requirements, accommodation for disabilities, overtime, working and safety
conditions and citizenship requirements. The Company is also subject to
regulation by the Federal Trade Commission and certain laws of States and
foreign countries which govern the offer and sale of franchises, several of
which are highly restrictive. Many State franchise laws impose substantive
requirements on the franchise agreement, including limitations on noncompetition
provisions and on provisions concerning the termination or nonrenewal of a
franchise. Some States require that certain materials be registered before
franchises can be offered or sold in that state. The failure to obtain or retain
food licenses or approvals to sell franchises, or an increase in the minimum
wage rate, employee benefit costs (including costs associated with mandated
health insurance coverage) or other costs associated with employees could
adversely affect the Company and its franchisees. A mandated increase in the
minimum wage rate was implemented in both 1997 and 1996.
The Company's construction, transportation and placement of
Modular Restaurant Packages is subject to a number of federal, state and local
laws governing all aspects of the manufacturing process, movement, end use and
location of the building. Many states require approval through state agencies
set up to govern the modular construction industry, other states have provisions
for approval at the local level. The transportation of the Company's Modular
Restaurant Package is subject to state, federal and local highway use laws and
regulations which may prescribe size, weight, road use limitations and various
other requirements. The descriptions and the substance of the Company's
warranties are also subject to a variety of state laws and regulations.
The Company has no material contracts with the United States
government or any of its agencies.
11
ITEM 2. PROPERTIES.
Of the 230 Restaurants which were operated by the Company as
of December 29, 1997, the Company held ground leases for 194 Restaurants and
owned the land for 36 Restaurants. The Company's leases are generally written
for a term of from five to twenty years with one or more five year renewal
options. Some leases require the payment of additional rent equal to a
percentage of annual revenues in excess of specified amounts. Ground leases are
treated as operating leases. Leasehold improvements made by the Company
generally become the property of the landlord upon expiration or earlier
termination of the lease; however, in most instances, if the Company is not in
default under the lease, the building, equipment and signs remain the property
of the Company and can be removed from the site upon expiration of the lease. In
the future, the Company intends, whenever practicable, to lease land for its
Restaurants. For further information with respect to the Company's Restaurants,
see "Restaurant Operations" under Item 1 of this Report.
The Company has 8 owned parcels of land and 31 leased parcels
of land which are available for sale or sub-lease. Of these parcels, 30 are
related to Restaurant closings as described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations". The other nine
parcels primarily represent surplus land available from multi-user sites where
the Company developed a portion for a Restaurant and undeveloped sites which the
Company ultimately decided it would not develop.
The Company's executive offices are located in approximately
19,600 square feet of leased space in the Barnett Bank Building, Clearwater,
Florida. The Company's lease will expire on April 30, 1998. In order to
accommodate additional staffing and on-site storage space needed as a result of
the Management Services Agreement, (see Item 1. "Business Employees"), the
Company has executed a five year lease with a new landlord for 26,500 square
feet of office space and 6,000 square feet of adjoining warehouse space in
Clearwater. The Company expects to relocate its executive office to this
location by July, 1998.
The Company owns a 89,850 square foot facility in Largo,
Florida. This includes a 70,850 square foot fabricated metal building for use in
its Modular Restaurant manufacturing operations, and two buildings totaling
19,000 square feet for its office and warehouse operations. See "Manufacturing
Operations" under Item 1 of this Report.
The Company also leases approximately 4,800 aggregate square
feet in two regional offices.
ITEM 3. LEGAL PROCEEDINGS
Except as described below, the Company is not a party to any
material litigation and is not aware of any threatened material litigation:
In re Checkers Securities Litigation, Master File No.
93-1749-Civ-T-17A. On October 13, 1993, a class action complaint was filed in
the United States District Court for the Middle District of Florida, Tampa
Division, by a stockholder against the Company, certain of its officers and
directors, including Herbert G. Brown, Paul C. Campbell, George W. Cook, Jared
D. Brown, Harry S. Cline, James M. Roche, N. John Simmons, Jr. and James F.
White, Jr., and KPMG Peat Marwick, the Company's auditors. The complaint
alleges, generally, that the Company issued materially false and misleading
financial statements which were not prepared in accordance with generally
accepted accounting principles, in violation of Section 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Florida common
law and statute. The allegations, including an allegation that the Company
inappropriately selected the percentage of completion method of accounting for
sales of modular restaurant buildings, are primarily directed to certain
accounting principles followed by Champion. The plaintiffs sought to represent a
class of all purchasers of the Company's Common Stock between November 22, 1991
and October 8, 1993, and an unspecified amount of damages. Although the Company
believed this lawsuit was unfounded and without merit, in order to avoid further
expenses of litigation, the parties reached an agreement in principle for the
settlement of this class action. The agreement for settlement provides for one
of the Company's director and officer liability insurance carriers and another
party to contribute to a fund for the purpose of paying claims on a claims-made
basis up to a total of $950,000. The Company has agreed to contribute ten
percent (10%) of claims made in excess of $475,000 for a total potential
liability of $47,500. The settlement was approved by the Court on January 30,
1998.
Greenfelder et al. v. White, ,Jr., et al. On August 10, 1995,
a state court Complaint was filed in the Circuit Court of the Sixth Judicial
Circuit in and for Pinellas County, Florida, Civil Division, entitled Gail P.
Greenfelder and Powers Burgers, Inc. v. James F. White, Jr., Checkers Drive-In
Restaurants, Inc., Herbert G. Brown, James E. Mattei, Jared D. Brown,
12
Robert G. Brown and George W. Cook, Case No. 95-4644-CI-21 (hereinafter the
"Power Burgers Litigation"). The original Complaint alleged, generally, that
certain officers of the Company intentionally inflicted severe emotional
distress upon Ms. Greenfelder, who is the sole stockholder, President and
Director of Powers Burgers, Inc. (hereinafter "Powers Burgers") a Checkers
franchisee. The original Complaint further alleged that Ms. Greenfelder and
Powers Burgers were induced into entering into various agreements and personal
guarantees with the Company based upon misrepresentations by the Company and its
officers and that the Company violated provisions of Florida's Franchise Act and
Florida's Deceptive and Unfair Trade Practices Act. The original Complaint
alleged that the Company is liable for all damages caused to the Plaintiffs. The
Plaintiffs seek damages in an unspecified amount in excess of $2,500,000 in
connection with the claim of intentional infliction of emotional distress,
$3,000,000 or the return of all monies invested by the Plaintiffs in Checkers'
franchises in connection with the misrepresentation of claims, punitive damages,
attorneys' fees and such other relief as the court may deem appropriate. The
Court has granted, in whole or in part, three (3) Motions to Dismiss the
Plaintiffs' Complaint, as amended, including an Order entered on February 14,
1997, which dismissed the Plaintiffs' claim of intentional infliction of
emotional distress, with prejudice, but granted the Plaintiffs leave to file an
amended pleading with respect to the remaining claims set forth in their Amended
Complaint. A third Amended Complaint has been filed and an Answer, Affirmative
Defenses, and a Counterclaim to recover unpaid royalties and advertising fund
contributions has been filed by the Company. In response to the Court's
dismissal of certain claims in the Power Burgers Litigation, on May 21, 1997 a
companion action was filed in the Circuit Court of the Sixth Judicial Circuit in
and for Pinellas County, Florida, Civil Division, entitled Gail P. Greenfelder,
Powers Burgers of Avon Park, Inc., and Power Burgers of Sebring, Inc. v. James
F. White, Jr., Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E.
Mattei, Jared D. Brown, Robert G. Brown and George W. Cook, Case No. 97-3565-CI,
asserting, in relevant part, the same causes of action as asserted in the Power
Burgers Litigation. An Answer, Affirmative Defenses, and a Counterclaim to
recover unpaid royalties and advertising fund contributions have been filed by
the Company. On February 4, 1998, the Company terminated Power Burgers, Inc.'s,
Power Burgers of Avon Park, Inc.'s and Power Burgers of Sebring, Inc.'s
franchise agreements and thereafter filed two Complaints in the United States
District Court for the Middle District of Florida, Tampa Division, styled
Checkers Drive-In Restaurants, Inc. v. Power Burgers of Avon Park, Inc., Case
No. 98-409-CIV-T-17A and Checkers Drive-In Restaurants, Inc. v. Powers Burgers,
Inc, Case No. 98-410-CIV-T-26E. The Complaint seeks, inter alia, a temporary and
permanent injunction enjoining Power Burgers, Inc. and Power Burgers of Avon
Park, Inc.'s continued use of Checkers' Marks and trade dress. A Motion to Stay
the foregoing actions are currently pending. The Company believes the lawsuits
initiated against the Company are without merit, and intends to continue to
defend them vigorously. No estimate of any possible loss or range of loss
resulting from the lawsuit can be made at this time.
Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food Services,
Inc., et al. On August 10, 1995, a state court Counterclaim and Third Party
Complaint was filed in the Circuit Court of the Thirteenth Judicial Circuit in
and for Hillsborough County, Florida, Civil Division, entitled Tampa Checkmate
Food Services, Inc., Checkmate Food Services, Inc. and Robert H. Gagne v.
Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E. Mattei, James F.
White, Jr., Jared D. Brown, Robert G. Brown and George W. Cook, Case No.
95-3869. In the original action filed by the Company in July 1995, against Mr.
Gagne and Tampa Checkmate Food Services, Inc., (hereinafter "Tampa Checkmate") a
company controlled by Mr. Gagne, the Company is seeking to collect on a
promissory note and foreclose on a mortgage securing the promissory note issued
by Tampa Checkmate and Mr. Gagne, and obtain declaratory relief regarding the
rights of the respective parties under Tampa Checkmate's franchise agreement
with the Company. The Counterclaim and Third Party Complaint allege, generally,
that Mr. Gagne, Tampa Checkmate and Checkmate Food Services, Inc. (hereinafter
"Checkmate") were induced into entering into various franchise agreements with,
and personal guarantees to, the Company based upon misrepresentations by the
Company. The Counterclaim and Third Party Complaint seek damages in the amount
of $3,000,000 or the return of all monies invested by Checkmate, Tampa Checkmate
and Mr. Gagne in Checkers' franchises, punitive damages, attorneys' fees and
such other relief as the court may deem appropriate. The Counterclaim was
dismissed by the court on January 26, 1996, with the right to amend. On February
12, 1996, the Counterclaimants filed an Amended Counterclaim alleging violations
of Florida's Franchise Act, Florida's Deceptive and Unfair Trade Practices Act,
and breaches of implied duties of "good faith and fair dealings" in connection
with a settlement agreement and franchise agreement between various of the
parties. The Amended Counterclaim seeks a judgment for damages in an unspecified
amount, punitive damages, attorneys' fees and such other relief as the court may
deem appropriate. The Company has filed an Answer to the Complaint. On or about
July 15, 1997, Tampa Checkmate filed a Chapter 11 petition in the United States
Bankruptcy Court for the Middle District of Florida, Tampa Division entitled In
re: Tampa Checkmate Food Services, Inc., and numbered as 97-11616-8G-1 on the
docket of said Court. On July 25, 1997, Checkers filed an Adversary Complaint in
the Tampa Checkmate bankruptcy proceedings entitled Checkers Drive-In
Restaurants, Inc. v. Tampa Checkmate Food Services, Inc. and numbered as Case
No. 97-738. The Adversary Complaint seeks a temporary and permanent injunction
enjoining Tampa Checkmate's continued use of Checkers' Marks and trade dress
notwithstanding the termination of its Franchise Agreement on April 8, 1997. The
Company believes that the lawsuit is without merit and intends to continue to
defend it vigorously. No estimate of possible loss or range of loss resulting
from the lawsuit can be made at this time.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
The Common Stock of the Company began trading publicly in the
over-the-counter market on the Nasdaq Stock Market's National Market on November
15, 1991, under the symbol CHKR. The following table sets forth the high and low
closing sale price of the Checkers Common Stock as reported in the Nasdaq
National Market for the periods indicated:
High Low
1997
First Quarter $3.00 $1.69
Second Quarter $1.84 $1.09
Third Quarter $1.69 $1.09
Fourth Quarter $1.59 $0.81
1996
First Quarter $1.75 $1.19
Second Quarter $1.50 $1.13
Third Quarter $1.25 $0.75
Fourth Quarter $1.97 $0.78
Holders
At March 16, 1998, the Company had approximately 7,085
stockholders of record.
Dividends
Dividends are prohibited under the terms of the Company's
major debt agreement. The Company has not paid or declared cash distributions or
dividends (other than the payment of cash in lieu of fractional shares in
connection with its stock splits). Any future cash dividends will be determined
by the Board of Directors based on the Company's earnings, financial condition,
capital requirements, debt covenants and other relevant factors.
Recent Unregistered Sales
During fiscal year 1997, the Company has engaged in the
following sales of its securities which were not registered under the Securities
Act of 1933, and which have not been previously reported.
None
14
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data
(in thousands, except per share data)
The selected historical consolidated Statement of Operations
data presented for each of the fiscal years in the three-year period ended
December 29, 1997 and Balance Sheet data as of December 29, 1997, and as of
December 30, 1996, were derived from, and should be read in conjunction with,
the audited consolidated financial statements and related notes of Checkers
Drive-In Restaurants, Inc. and subsidiaries included elsewhere herein. The
Statement of Operations data for the year ended January 2, 1995 and December 31,
1993 and Balance Sheet data as of January 1, 1996, January 2, 1995 and December
31, 1993 were derived from audited financial statements not included herein.
As of January 1, 1994, the Company changed from a calendar
reporting year ending on December 31st to a fiscal year which will generally end
on the Monday closest to December 31st. Each quarter consists of three 4-week
periods, with the exception of the fourth quarter which consists of four 4-week
periods.
Fiscal Years Ending
---------------------------------------------------------------
Dec. 29, Dec. 30, Jan. 1, Jan. 2, Dec. 31,
1997 1996 1996 1995 1993
----------------------------------------------------------------
Statements of Operations:
-------------------------
Net Operating Revenue $ 143,893 $ 164,960 $ 190,305 $ 215,115 $ 184,027
Restaurant Operating Costs $ 127,839 $ 156,548 $ 167,836 $ 173,087 $ 124,384
Cost of Modular Restaurant Package
Revenues 618 1,704 4,854 10,485 20,208
Other Depreciation and Amortization 2,263 4,326 4,044 2,796 1,325
General and Administrative Expense 16,123 20,690 24,215 21,875 14,048
SFAS 121 Impairment and Other Loss Provisions 1,027 23,905 26,572 14,771 -
Interest Expense 8,650 6,233 5,724 3,564 556
Interest Income 375 678 674 326 273
Minority Interests in Income (Loss) (66) (1,509) (192) 185 342
Income from Continuing Operations (Pretax) $ (12,186) $ (46,258) $ (42,074) $ (11,324) $ 23,437
Income from Continuing Operations
(Pretax) per Common Share $ (0.19) $ (0.89) $ (0.83) $ (0.23) $ 0.49
Balance Sheet:
--------------
Total Assets $ 115,401 $ 136,110 $ 166,819 $ 196,770 $ 179,950
Long-Term Obligations and Redeemable
Preferred Stock $ 29,401 $ 39,906 $ 38,090 $ 38,341 $ 36,572
Cash Dividends Declared per Common Share $ - $ - $ - $ - $ -
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Introduction
The Company commenced operations on August 1, 1987, to operate and
franchise Checkers Double Drive-Thru Restaurants. As of December 29, 1997, the
Company had an ownership interest in 230 Company-operated Restaurants and an
additional 249 Restaurants were operated by franchisees. The Company's ownership
interest in the Company-operated Restaurants is in one of two forms: (i) the
Company owns 100% of the Restaurant (as of December 29, 1997, there were 218
such Restaurants) and (ii) the Company owns a 10.55% or 65.83% interest in a
partnership which owns the Restaurant (a "Joint Venture Restaurant") (as of
December 30, 1996, there were 12 such Joint Venture Restaurants). (See "Business
Restaurant Operations - Joint Venture Restaurants" in Item 1 of this Report.)
The Company realized significant reductions in food, paper and
labor costs during 1997. These costs totaled 64.5% of restaurant revenues in
1997 versus 72.1% in 1996. This improvement in costs was achieved despite the
9.9% decline in comparable store sales in 1997 versus 1996. Management's efforts
to improve food, paper, and labor costs by implementing tighter operational
controls was supplemented by cost of sales reductions realized by cooperating
with CKE Restaurants, Inc. and Rally's Hamburgers, Inc. to leverage the
purchasing power of the three entities to negotiate improved terms for their
respective contacts with suppliers.
As of March 1996, the Company had 53 Company and franchise
Restaurants testing its proprietary L.A. Mex Mexican brand. Although initial
sales were encouraging, the sales increases resulted in little or no
contribution to the profitability of the test units. Additionally, speed of
service was adversely impacted by the addition of the L.A. Mex products. As a
result, the Company terminated the tests during the first two quarters of fiscal
year 1997.
Significant management changes have occurred since the end of the
third quarter of fiscal year 1997. Effective November 10, 1997, C. Thomas
Thompson resigned as the Company's Chief Executive Officer. On that same date,
James J. Gillespie was appointed to serve as Chief Executive Officer of the
Company and of Rally's Hamburgers, Inc. ("Rally's"). Mr. Thompson has retained
his position on the Board of Directors of the Company. Effective December 15,
1997, Robert L. Purple was appointed Senior Vice President of Marketing and
Steven M. Cohen was appointed Senior Vice President of Human Resources.
Effective January 5, 1998 Richard A. Peabody was appointed Vice President and
Chief Financial Officer, assuming the financial responsibilities previously held
by Mr. Joseph N. Stein who retained his position as Executive Vice President and
Chief Administrative Officer. On January 26, 1998 David M. Bunch was appointed
Sr. Vice President of Real Estate Development. On February 23, 1998, Harvey
Fattig was appointed Executive Vice President and Chief Operating Officer of the
Company and of Rally's.
Early in fiscal 1997, the Company applied a marketing strategy
that included a greater emphasis on the quality of the burgers and fries that
the Company offers, and an increased emphasis on combo meals. The Company
introduced a new advertising campaign in several Company-operated markets, as
well as the Tampa co-op television markets in the fall of 1997. The campaign was
based on strategic research, which confirmed the consumer belief in the freshly
prepared quality of the products. The new creative, which features a "commercial
within a commercial" focus, invites a customer to make his/her own commercial,
since "we make everything fresh here at Checkers". Created by the Company's new
advertising agency, Crispin, Porter and Bogusky out of Miami, Florida, the
Company believes that these fun and engaging spots communicate the core belief
of the consumer, and dovetail nicely into the broader strategic position of the
best burger in the fast food industry. Television remains the primary
advertising medium in the Company's core markets, while radio, outdoor and
direct mail print provide the primary coverage in other, less efficient markets.
In fiscal year 1997, the Company, along with its franchisees,
experienced a net increase of one operating restaurant. In 1998, the franchise
community has indicated an intent to open up to 30 new units and the Company
intends to close fewer restaurants focusing on improving Restaurant margins. The
franchise group as a whole continues to experience higher average per store
sales than Company stores.
The Company receives revenues from Restaurant sales, franchise
fees, royalties and sales of fully-equipped manufactured MRP's. Cost of
Restaurant sales relates to food and paper costs. Other Restaurant expenses
include labor and all other Restaurant costs for Company-operated Restaurants.
Cost of MRP's relates to all Restaurant equipment and building materials, labor
and other direct and indirect costs of production. Other expenses, such as
depreciation and amortization, and selling, general and administrative expenses,
relate both to Company-operated Restaurant operations and MRP revenues as well
16
as the Company's franchise sales and support functions. The Company's revenues
and expenses are affected by the number and timing of additional Restaurant
openings and the sales volumes of both existing and new Restaurants. MRP
revenues are directly affected by the number of new franchise Restaurant
openings and the number of new MRP's produced or used MRP's refurbished for sale
in connection with those openings.
Results of Operations The following table sets forth the percentage relationship
to total revenues of the listed items included in the Company's Consolidated
Statements of Operations. Certain items are shown as a percentage of Restaurant
sales and Modular Restaurant Package revenue. The table also sets forth certain
selected Restaurant operating data.
Fiscal Year Ended
-----------------------------------------------------------
Dec. 29, Dec. 30, Jan.1,
1997 1996 1996
-----------------------------------------------------------
Revenues:
- ---------
Restaurant Sales 94.3 % 94.2 % 93.9 %
Royalties 4.9 % 4.5 % 4.0 %
Franchise Fees 0.3 % 0.6 % 0.5 %
Modular Restaurant Packages 0.5 % 0.7 % 1.6 %
-----------------------------------------------------------
Total Revenues 100.0 % 100.0 % 100.0 %
-----------------------------------------------------------
Costs and Expenses:
-------------------
Restaurant Food and Paper Cost(1) 32.1 % 35.2 % 35.7 %
Restaurant Labor Costs(l) 32.4 % 36.9 % 32.6 %
Restaurant Occupancy Expense(1) 8.6 % 8.3 % 6.5 %
Restaurant Depreciation and Amortization(1) 6.1 % 5.7 % 6.0 %
Advertising Expense(l) 5.0 % 4.8 % 4.5 %
Other Restaurant Operating Expenses(l) 9.9 % 9.9 % 8.7 %
Cost of Modular Restaurant Package Revenues(2) 87.1 % 141.8 % 162.1 %
Other Depreciation and Amortization 1.6 % 2.6 % 2.1 %
Selling, General and Administrative Expenses 11.2 % 12.5 % 12.7 %
Impairment of Long-lived Assets 0.4 % 9.0 % 9.9 %
Losses on Assets to be Disposed of 0.2 % 4.3 % 1.7 %
Loss provisions 0.1 % 1.2 % 2.3 %
-----------------------------------------------------------
Operating Loss (2.8)% (25.6)% (19.6)%
Other Income (Expense):
-----------------------
Interest Income 0.3 % 0.4 % 0.4 %
Interest Expense (6.0)% (3.8)% (3.1)%
Minority Interest in Earnings (0.0)% (0.9)% (0.1)%
-----------------------------------------------------------
Loss Before Income Tax Expense (Benefit) (8.5)% (28.0)% (22.1)%
Income Tax Expense (Benefit) 0.0 % 0.1 % (4.7)%
-----------------------------------------------------------
Net Loss (8.5)% (28.1)% (17.5)%
===========================================================
Net Loss to Common Shareholders (9.0)% (28.1)% (17.5)%
===========================================================
17
Fiscal Year Ended
-----------------------------------------------------------
Dec. 29, Dec. 30, Jan.1,
1997 1996 1996
-----------------------------------------------------------
Operating Data:
System Wide Restaurant Sales (in 000's)
Company Operated $ 135,710 $ 155,392 $ 178,744
Franchise $ 174,600 $ 172,566 $ 190,151
-----------------------------------------------------------
Total $ 310,310 $ 327,958 $ 368,895
===========================================================
Average Annual Net Sales Per Restaurant Open
For A Full Year (in 000's)(3):
Company Operated $ 586 $ 651 $ 721
Franchised $ 737 755 814
-----------------------------------------------------------
System Wide $ 661 $ 699 $ 765
-----------------------------------------------------------
Number of Restaurants (4)
Company Operated 230 232 242
Franchised 249 246 257
-----------------------------------------------------------
Total 479 478 499
===========================================================
- ------------------------------------------------------------
(1) As a percent of Restaurant sales.
(2) As a percent of Modular Restaurant Package revenues.
(3) Includes sales for Restaurants open for entire trailing 13 periods, and
stores expected to be closed in the following year.
(4) Number of Restaurants open at end of period.
Comparison of Historical Results - Fiscal Years 1997 and 1996
Revenues. Total revenues decreased 12.8% to $143.9 million in
1997 compared to $165 million in 1996. Company-operated restaurant sales
decreased 12.7% to $135.7 million in 1997 from $155.4 million in 1996. The
decrease resulted partially from a net reduction of 2 Company-operated
Restaurants since December 30, 1996. Comparable Company-operated Restaurant
sales for the year ended December 29, 1997, decreased 9.9% as compared to the
year ended December 30, 1996, which includes those Restaurants open at least 26
periods. These decreases in restaurant sales and comparable Restaurant sales is
primarily attributable to a highly competitive environment during 1997 and the
Company's focus on cutting costs while developing a new marketing strategy.
Franchise revenues and fees decreased 10.7% to approximately
$7.5 million in 1997 from approximately $8.4 million in 1996. An actual decrease
of $503,000 was a direct result of one fewer franchised Restaurant opening as
well as a decline in comparable franchise restaurant sales of 5.9% during 1997,
and a decline in the weighted average royalty rate charge due to openings in
Puerto Rico, as well as certain discounting of fees on non-standard Restaurant
openings. The remaining decrease of $390,000 is due to the recording of revenue
from terminations of Area Development Agreements during the year ended December
30, 1996. The Company recognizes franchise fees as revenues when the Company has
substantially completed its obligations under the franchise agreement, usually
at the opening of the franchised Restaurant.
MRP revenues decreased 40.9% to $710,000 in 1997 compared to
$1.2 million in 1996 due to decreased sales volume of MRP's to the Company's
franchisees which is a result of franchisees sales of used MRP's and the
Company's efforts to refurbish and sell its inventory of used MRP's from
previously closed sites. These efforts have been successful, however, these
sales have negatively impacted the new building revenues. MRP revenues are
recognized on the percentage of completion method during the construction
process; therefore, a substantial portion of MRP revenues are recognized prior
to the opening of a Restaurant.
18
Costs and expenses. Restaurant food ($40.6 million) and paper
($3.0 million) costs totaled $43.6 million or 32.1% of restaurant sales for
1997, compared to $54.7 million ($49.5 million food costs; $5.2 million, paper
costs) or 35.2% of restaurant sales for 1996. The dollar decrease in food and
paper costs was due primarily to the decrease in restaurant sales while the
decrease in these costs as a percentage of restaurant sales was due to new
purchasing contracts negotiated in early 1997.
Restaurant labor costs, which includes restaurant employees'
salaries, wages, benefits and related taxes, totaled $43.9 million or 32.4% of
restaurant sales for 1997, compared to $57.3 million or 36.9% of restaurant
sales for 1996. The decrease in restaurant labor costs as a percentage of
restaurant sales was due primarily to various Restaurant level initiatives
implemented in the first quarter of 1997, partially offset by a minimum wage
increase in 1997.
Restaurant occupancy expense, which includes rent, property
taxes, licenses and insurance, totaled $11.7 million or 8.6% of restaurant sales
for 1997, compared to $12.9 million or 8.3% of restaurant sales for 1996. The
increase in restaurant occupancy costs as a percentage of restaurant sales was
due primarily to the decline in average restaurant sales relative to the fixed
nature of these expenses and also higher average occupancy costs resulting from
the acquisition of interests in 12 Restaurants in Chicago, Illinois in July,
1996.
Restaurant depreciation and amortization decreased 6.0% to
$8.3 million for 1997, from $8.8 million for 1996, due primarily to 1996
impairments recorded under Statement of Financial Accounting Standards No. 121
and the impact of Restaurant closures during late 1996 and early 1997. However,
as a percentage of restaurant sales, these expenses increased to 6.1% in 1997
from 5.7% in 1996 due to the decline in average restaurant sales.
Advertising expense decreased to $6.8 million or 5.0% of
restaurant sales for 1997 which did not materially differ from the $7.4 million
or 4.8% of restaurant sales spent for advertising in 1996.
Other restaurant expenses includes all other Restaurant level
operating expenses other than food and paper costs, labor and benefits, rent and
other costs which includes utilities, maintenance and other costs. These
expenses which declined consistently with sales declines, totaled $13.5 million
or 9.9% of restaurant sales for 1997 compared to $15.3 million or 9.9% of
restaurant sales for 1996, resulting primarily from Restaurant closures in late
1996 and early 1997.
Costs of MRP revenues totaled $618,000 or 87.1% of MRP
revenues for 1997, compared to $1.7 million or 141.8% of such revenues for 1996.
The decrease in these expenses as a percentage of MRP revenues was attributable
to the elimination of various excess fixed costs in the first quarter of 1997.
General and administrative expenses decreased to $16.1 million
or 11.2% of total revenues in 1997 from $20.7 million or 12.5% of total revenues
in 1996. The 1997 general and administrative expenses were increased by
accounting charges of $314,000 for severance and relocations. The 1996 general
and administrative expenses were increased by accounting charges of $3.6 million
consisting of $1.1 million in unusual bad debt expenses and other, $750,000
provisions for state sales tax audits, $925,000 for severance and relocation and
a $845,000 write-off of capitalized costs incurred in connection with the
Company's previous lending arrangements with its bank group. The actual decrease
in normal recurring general and administrative expenses before 1996 and 1997
accounting charges of $1.3 million was mostly attributed to a reduction in
corporate staffing early in 1997.
Accounting Charges and Loss Provisions. During the fourth
quarter of 1997, the Company recorded accounting charges and loss provisions of
$1.3 million, to accrue for severance and relocations ($314,000) to impair
goodwill associated with one under-performing store ($565,000) , to provide for
additional losses on assets to be disposed due to certain sublease properties
being converted to surplus ($312,000), and a provision for the aging of Champion
inventories ($150,000).
The Company recorded accounting charges and loss provisions of
$16.8 million during the third quarter of 1996, $2.1 million of which consisted
of various selling, general and administrative expenses ($500,000 provision for
bad debt, a $750,000 provision for state sales tax audits and refinancing costs
of $845,000 were recorded to expense capitalized costs incurred in connection
with the Company's previous lending arrangements with its bank group.).
Provisions totaling $14.2 million to close 27 restaurants, relocate 22 of them
($4.2 million), settle 16 leases on real property underlying these stores ($1.2
million) and sell land underlying the other 11 restaurants ($307,000), and
impairment charges related to an additional 28 under-performing restaurants
($8.5 million) were recorded. A loss provision of $500,000 was also recorded to
reserve for Champion's finished buildings inventory as an adjustment to fair
market value.
Additional accounting charges and loss provisions of $12.8
million were recorded during the fourth quarter of
19
1996, $1.5 million of which consisted of various selling, general and
administrative expenses (including $579,000 for severance, $346,000 for employee
relocations, bad debt provisions of $366,000 and $204,000 for other charges).
Provisions totaling $7.7 million, including $1.4 million for additional losses
on assets to be disposed of, $5.4 million for impairment charges related to 9
under-performing restaurants received by the Company through a July 1996
franchisee bankruptcy action and $393,000 for other impairment charges were also
recorded. Additionally, in the fourth quarter of 1996, a $1.1 million provision
for loss on the disposal of the L.A. Mex product line, workers compensation
accruals of $1.1 million (included in restaurant labor costs), adjustments to
goodwill of approximately $510,000 (included in other depreciation and
amortization) and approximately a $453,000 charge for the assumption of minority
interests in losses on joint-venture operations as a result of the receipt by
the Company of certain assets from the bankruptcy of a franchisee.
Interest expense. Interest expense other than loan cost
amortization decreased to $5.0 million or 3.5% of total revenues in 1997 from
$6.1 million or 3.7% of total revenues in 1996. This decrease was due to a
reduction in the weighted average balance of debt outstanding during the
respective periods, partially offset by an increase in the Company's effective
interest rates since the second quarter of 1996. Loan cost amortization
increased by $3.5 million from $159,000 in 1996 to $3.7 million in 1997 due to
the November 22, 1996 capitalization of deferred loan costs and $9.7 million in
unscheduled principal reductions in early 1997.
Income tax expense (benefit). There were no net taxes after
valuation allowances for 1997. Due to the loss for 1996, the Company recorded an
income tax benefit of $18.0 million or 38.9% of the loss before income taxes and
recorded a deferred income tax valuation allowance of $18.1 million, resulting
in a net tax expense of $151,000 for 1996. The effective tax rates differ from
the expected federal tax rate of 35.0% due primarily to state income taxes.
Net loss. As stated above earnings were significantly impacted
by the loss provisions and the write-downs associated with SFAS 121 in 1997 and
in 1996. Net loss before tax and the provisions (provisions totaled $1.3 million
in 1997 and $29.6 million in 1996) was $10.9 million or $.17 per share for 1997
and $16.7 million or $.32 per share for 1996, which resulted primarily from an
increase in the net Restaurant margins, decreases in depreciation and
amortization, general and administrative expenses, and interest expense other
than loan cost amortization, partially offset by a decrease in royalties and
franchises fees and an increase in loan cost amortization.
Comparison of Historical Results - Fiscal Years 1996 and 1995
Revenues. Total revenues decreased 13.3% to $165.0 million in
1996 compared to $190.3 million in 1995. Company-operated restaurant sales
decreased 13.1% to $155.4 million in 1996 from $178.7 million in 1995. The
decrease resulted partially from a net reduction of 10 Company-operated
Restaurants since January 1, 1996. Comparable Company-operated Restaurant sales
for the year ended December 30, 1996, decreased 9.7% as compared to the year
ended January 1, 1996, which includes those Restaurants open at least 13
periods. These decreases in restaurant sales and comparable Restaurant sales is
primarily attributable to continuing sales pressure from competitor discounting,
severe weather in January and February of 1996 and the inability of the Company
to effect a competitive advertising campaign during fiscal 1996.
Royalties decreased 2.2% to $7.4 million in 1996 from $7.6
million in 1995 due primarily to a net reduction of 11 franchised Restaurants
since January 1, 1996. Comparable franchised Restaurant sales for Restaurants
open at least 12 months for the year ended December 30, 1996, decreased
approximately 7.2% as compared to the year ended January 1, 1996. The Company
believes that the decline in sales experienced by franchisees can be attributed
primarily to the same factors noted above, but that these factors may have been
mitigated to some extent by the location in many instances of franchise
restaurants in less competitive markets.
Franchise fees decreased 3.2% to approximately $930,000 in
1996 from approximately $961,000 in 1995. An actual decrease of $421,000 as a
direct result of fewer franchised Restaurants opened as well as certain
discounting of fees on non-standard Restaurant openings, offset by the effect of
recording $390,000 of revenue from terminations of Area Development Agreements
during the year ended December 30, 1996, generated the net decrease of $31,000.
The Company recognizes franchise fees as revenues when the Company has
substantially completed its obligations under the franchise agreement, usually
at the opening of the franchised Restaurant.
MRP revenues decreased 59.9% to $1.2 million in 1996 compared
to $3.0 million in 1995 due to decreased sales volume of MRP's to the Company's
franchisees which is a result of a slow down in franchisee Restaurant opening
activity. Also, the Company made a concerted effort to refurbish and sell its
inventory of used MRP's from previously closed sites. These efforts have been
successful, however, these sales have negatively impacted the new building
revenues. MRP revenues are
20
recognized on the percentage of completion method during the construction
process; therefore, a substantial portion of MRP revenues are recognized prior
to the opening of a Restaurant.
Costs and expenses. Restaurant food ($49.5 million) and paper
($5.2 million) costs totaled $54.7 million or 35.2% of restaurant sales for
1996, compared to $63.7 million ($57.6 million food costs; $6.1 million, paper
costs) or 35.7% of restaurant sales for 1995. The decrease in food and paper
costs as a percentage of restaurant sales was due primarily to decreases in beef
costs and paper costs experienced by the Company during fiscal 1996, partially
offset by various promotional discounts in the final two quarters of 1996.
Restaurant labor costs, which includes restaurant employees'
salaries, wages, benefits and related taxes, totaled $57.3 million or 36.9% of
restaurant sales for 1996, compared to $58.2 million or 32.6% of restaurant
sales for 1995. The increase in restaurant labor costs as a percentage of
restaurant sales was due primarily to the decline in average restaurant sales
relative to the semi-variable nature of these costs; a high level of turnover in
the regional management positions, which caused inconsistencies in the
management of labor costs in the Restaurants; increase in labor costs resulting
from the L.A. Mex dual brand test; and increase in the federal minimum wage
rate. The decrease in actual expense was caused by a reduction in the variable
portion of labor expenses as sales declined.
Restaurant occupancy expense, which includes rent, property
taxes, licenses and insurance, totaled $12.9 million or 8.3% of restaurant sales
for 1996, compared to $11.6 million or 6.5% of restaurant sales for 1995. This
increase in restaurant occupancy costs as a percentage of restaurant sales was
due primarily to the decline in average restaurant sales relative to the fixed
nature of these expenses and also higher average occupancy costs resulting from
the acquisition of interests in 12 Restaurants in Chicago, Illinois.
Restaurant depreciation and amortization decreased 16.9% to
$8.8 million for 1996, from $10.6 million for 1995, due primarily to late 1995
and 1996 impairments recorded under Statement of Financial Accounting Standards
No. 121 which was adopted as of January 1, 1996.
Advertising decreased to $7.4 million or 4.8% of restaurant
sales for 1996 which did not materially differ from the $8.1 million or 4.5% of
restaurant sales spent for advertising in 1995.
Other restaurant expenses includes all other Restaurant level
operating expenses other than food and paper costs, labor and benefits, rent and
other costs which includes utilities, maintenance and other costs. These
expenses totaled $15.3 million or 9.9% of restaurant sales for 1996 compared to
$15.6 million or 8.7% of restaurant sales for 1995. The increase for 1996 as a
percentage of restaurant sales, was primarily related to the decline in average
restaurant sales relative to the fixed and semi-variable nature of many
expenses.
Costs of MRP revenues totaled $1.7 million or 141.8% of MRP
revenues for 1996, compared to $4.9 million or 162.1% of such revenues for 1995.
The decrease in these expenses as a percentage of MRP revenues was attributable
to a third quarter 1995 accounting charge of $500,000 to write-down excess work
in process buildup and a reduction in direct and indirect labor in early 1996.
General and administrative expenses decreased to $20.7 million
or 12.5% of total revenues in 1996 from $24.2 million or 12.7% of total revenues
in 1995. The decrease in these expenses was primarily attributable to a decrease
in corporate overhead costs as a result of the Company's restructuring during
1995 and early 1996.
Accounting Charges and Loss Provisions. The Company recorded
accounting charges and loss provisions of $16.8 million during the third quarter
of 1996, $2.1 million of which consisted of various general and administrative
expenses ($500,000 provision for bad debt, a $750,000 provision for state sales
tax audits and refinancing costs of $845,000 recorded to expense capitalized
costs incurred in connection with the Company's previous lending arrangements
with its bank group). Provisions totaling $14.2 million to close 27 restaurants,
relocate 22 of them ($4.2 million) settle 16 leases on real property underlying
these stores ($1.2 million) and sell land underlying the other 11 restaurants
($307,000), and impairment charges related to an additional 28 under-performing
restaurants ($8.5 million) were recorded. A loss provision of $500,000 was also
recorded to reserve for Champion's finished buildings inventory as an adjustment
to fair market value.
Additional accounting charges and loss provisions of $12.8
million were recorded during the fourth quarter of 1996, $1.5 million of which
consisted of various general and administrative expenses (including $579,000 for
severance, $346,000 for employee relocations, bad debt provisions of $366,000
and $204,000 for other charges). Provisions totaling $7.7
21
million, including $1.4 million for additional losses on assets to be disposed
of, $5.4 million for impairment charges related to 9 under-performing
restaurants received by the Company through a July 1996 franchisee bankruptcy
action and $393,000 for other impairment charges were also recorded.
Additionally, in the fourth quarter of 1996, a $1.1 million provision for loss
on the disposal of the L.A. Mex product line, workers compensation accruals of
$1.1 million (included in restaurant labor costs), adjustments to goodwill of
approximately $510,000 (included in other depreciation and amortization) and
approximately a $453,000 charge for the assumption of minority interests in
losses on joint-venture operations as a result of the receipt by the Company of
certain assets from the bankruptcy of a franchisee.
Third quarter 1995 accounting charges and loss provisions of
$8.8 million consisted of $2.9 million in various selling, general and
administrative expenses (write-off of $1.2 million in receivables, accruals for
$125,000 in recruiting fees, $304,000 in relocation costs, $274,000 in severance
pay, $101,000 in state taxes, reserves of $700,000 for legal settlements, the
write-off of a $263,000 investment in an apparel company); $3.2 million to
provide for restaurants relocation costs, write-down and abandoned site costs;
$344,000 to expense refinancing costs; $645,000 to provide for inventory
obsolescence; $1.5 million for workers compensation exposure included in
restaurant labor costs and $185,000 in other charges, net, including the
$499,000 write-down of excess work in progress inventory costs and a minority
interest credit of $314,000.
Fourth quarter 1995 accounting charges included $3.0 million
for warrants to be issued in settlement of litigation (see Item 3 - Lopez, et al
vs. Checkers) and to accrue approximately $800,000 for legal fees in connection
with the settlement and continued defense of various litigation matters.
Additionally, during the fourth quarter of 1995, the Company early adopted
Statement of Financial Accounting Standard No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS
121) which requires a write-down of certain intangibles and property related to
under performing sites. The effect of adopting SFAS 121 was a total charge to
earnings for 1995 of $18.9 million, consisting of a $5.9 million write-down of
goodwill and a $13.1 million write-down of property and equipment.
Interest expense. Total interest expense increased to $6.2
million or 3.8% of total revenues in 1996 from $5.7 million or 3.0% of total
revenues in 1995. This increase was due to the Company's 1996 debt restructuring
and related amortization of deferred loan costs.
Income tax expense (benefit). Due to the loss for 1996, the
Company recorded an income tax benefit of $18.0 million or 38.9% of the loss
before income taxes and recorded a deferred income tax valuation allowance of
$18.1 million, resulting in a net tax expense of $151,000 for 1996, as compared
to an income tax benefit of $16.5 million or 39.1% of earnings before income
taxes and recorded a deferred income tax valuation allowance of $7.6 million
resulting in a net tax benefit of $8.9 million for 1995. The effective tax rates
differ from the expected federal tax rate of 35.0% due primarily to state income
taxes.
Net loss. As stated above earnings were significantly impacted
by the loss provisions and the write-downs associated with SFAS 121 in 1996 and
in 1995. Net loss before tax and the provisions (provisions totaled $29.6
million in 1996 and $31.6 million in 1995) was $16.7 million or $.32 per share
for 1996 and $10.5 million or $.21 per share for 1995, which resulted primarily
from a decrease in the average Restaurant sales and margins, and a decrease in
royalties and franchise fees, offset by a decrease in depreciation and
amortization and general and administrative expenses.
Liquidity and Capital Resources
On October 28, 1993, the Company entered into a loan agreement
(the "Loan Agreement") with a group of banks ("Bank Group") providing for an
unsecured, revolving credit facility. The Company borrowed approximately $50
million under this facility primarily to open new Restaurants and pay off
approximately $4 million of previously-existing debt. The Company subsequently
arranged for the Loan Agreement to be converted to a term loan and
collateralized the term loan and a revolving line of credit ranging from $1
million to $2 million (the "Credit Line") with substantially all of the
Company's assets.
On July 29, 1996, the debt under the Loan Agreement and Credit
Line was acquired from the Bank Group by an investor group led by an affiliate
of DDJ Capital Management, LLC (collectively, "DDJ"). On November 14, 1996, the
debt under the Loan Agreement and Credit Line was acquired from DDJ by a group
of entities and individuals, most of whom are engaged in the fast food
restaurant business. This investor group (the "CKE Group") was led by CKE
Restaurants, Inc., the parent of Carl Karcher Enterprises, Inc., Taco Bueno
Restaurants, Inc., and Summit Family Restaurants, Inc. Also participating were
most members of the DDJ Group, Fidelity National Financial, Inc. ("Fidelity")
and KCC Delaware Company, a wholly-owned subsidiary of GIANT GROUP, LTD., CKE,
Fidelity and GIANT are the largest stockholders of Rally's Hamburgers, Inc.
On November 22, 1996, the Company and the CKE Group executed
an Amended and Restated Credit
22
Agreement (the "Restated Credit Agreement") thereby completing a restructuring
of the debt under the Loan Agreement. The Restated Credit Agreement consolidated
all of the debt under the Loan Agreement and the Credit Line into a single
obligation. At the time of the restructuring, the outstanding principal balance
under the Loan Agreement and the Credit Line was $35.8 million. Pursuant to the
terms of the Restated Credit Agreement, the term of the debt was extended by one
(1) year until July 31, 1999, and the interest rate on the indebtedness was
reduced to a fixed rate of 13%. In addition, all principal payments were
deferred until May 19, 1997, and the CKE Group agreed to eliminate certain
financial covenants, to relax others and to eliminate approximately $4.3 million
in restructuring fees and charges. The Restated Credit Agreement also provided
that certain members of the CKE Group agreed to provide to the Company a short
term revolving line of credit of up to $2.5 million, also at a fixed interest
rate of 13% (the "Secondary Credit Line"). In consideration for the
restructuring, the Restated Credit Agreement required the Company to issue to
the members of the CKE Group warrants to purchase an aggregate of 20 million
shares of the Company common stock at an exercise price of $.75 per share, which
was the approximate market price of the common stock prior to the announcement
of the debt transfer. Since November 22, 1996, the Company has reduced the
principal balance under the Restated Credit Agreement by $9.7 million and has
repaid the Secondary Credit Line in full. A portion of the funds utilized to
make these principal reduction payments were obtained by the Company from the
sale of certain closed restaurant sites to third parties. Additionally, the
Company utilized $10.5 million of the proceeds from the February 21, 1997,
private placement as described later in this section. Pursuant to the Restated
Credit Agreement, the prepayments of principal made in 1996 and early in 1997
will relieve the Company of the requirement to make any of the regularly
scheduled principal payments under the Restructured Credit Agreement which would
have otherwise become due in fiscal year 1998 through maturity. The Restated
Credit Agreement provides however, that 50% of any future asset sales must be
utilized to prepay principal.
The Company's Restated Credit Agreement with the CKE Group
contains restrictive covenants which include the consolidated EBITDA covenant as
defined. As of December 29, 1997, the Company was in violation of the
consolidated EBITDA covenant. The violation was primarily due to the Company
recording certain accounting charges and loss provisions in period 13 of fiscal
1997, as discussed in Note 8 to the consolidated financial statements (see Item
8). The Company received a waiver for period 13 of fiscal 1997 and for periods
one and two of fiscal 1998. The Company expects to cure the covenant violation
for period three of fiscal 1998 due to the effect of period 13 of fiscal 1997 no
longer impacting the trailing three period reporting calculation. Consequently
the debt obligation has been classified as a long-term obligation as of December
29, 1997.
On February 21, 1997, the Company completed a private
placement (the "Private Placement") of 8,771,929 shares of the Company's common
stock, $.001 par value, and 87,719 shares of the Company's Series A preferred
stock, $114 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased
6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and
other qualified investors, including other members of the CKE Group of lenders
under the Restated Credit Agreement, also participated in the Private Placement.
The Company received approximately $19.5 million in proceeds from the Private
Placement. The Company used $8 million of the Private Placement proceeds to
reduce the principal balance due under the Restated Credit Agreement; $2.5
million was utilized to repay the Secondary Credit Line; $2.3 million was
utilized to pay outstanding balances to various key food and paper distributors;
and the remaining amount was used primarily to pay down outstanding balances due
certain other vendors. The reduction of the debt under the Restated Credit
Agreement and the Secondary Credit Line, both of which carried a 13% interest
rate reduced the Company's interest payments by more than $1.3 million on an
annualized basis.
During 1997, the Company acquired the minority share of one
joint-venture restaurant, the operations and certain of the equipment including
one MRP associated with five operating franchise restaurants and one closed
franchise having an aggregate fair value of $1.4 million. Total consideration
consisted of net cash disbursements totaling $282,000, the assumption of
$803,000 in long-term debts and capital leases, other accruals of $95,000,
relief of minority interests of $372,000, forgiveness of receivables of
$114,000, and distribution of property of $438,000. As a result of this
transaction, goodwill of $831,000 was recorded.
On August 6, 1997, the 87,719 shares of preferred stock were
converted into 8,771,900 shares of the Company's common stock valued at $10
million. In accordance with the agreement underlying the Private Placement (the
"Private Placement Agreement"), the Company also issued 610,524 shares of common
stock as a dividend pursuant to the liquidation preference provisions of the
Private Placement Agreement, valued at $696,000 to the holders of the preferred
stock issued in the Private Placement.
At November 14, 1997, the effective date of the Company's
Registration Statements on Forms S-4, the Company had outstanding promissory
notes in the aggregate principal amount of approximately $3.2 million (the
"Notes") payable to Rall-Folks, Inc. ("Rall-Folks"), Restaurant Development
Group, Inc. ("RDG") and Nashville Twin Drive-Through Partners, L.P. (N.T.D.T.").
The Company agreed to acquire the Notes issued to Rall-Folks and RDG in
consideration of the issuance of an aggregate of approximately 1.9 million
shares of Common Stock and the Note issued to NTDT in exchange for a series of
convertible notes in the same aggregate principal amount and convertible into
approximately 614,000 shares of Common Stock pursuant to agreements entered into
in 1995 and subsequently amended. All three of the parties received varying
degrees of protection on the purchase price of the promissory notes.
Accordingly, the actual number of shares to be issued was to be determined by
the market price of the Company's stock. Consummation of the Rall-Folks, RDG,
and NTDT purchases occurred on November 24, and December 5, and November 24,
1997, respectively.
During December 1997 and January 1998, the Company issued an
aggregate of 2,943,752 shares of Common
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Stock to Rall-Folks, RDG and NTDT in payment of $3.2 million of principal and
accrued interest relating to the Note. In January 1998, the Company issued
279,868 share of Common Stock to Rall-Folks pursuant to the purchase price
protection provisions of Note re-purchase agreement with the Company.
Rall-Folks has completed the sale of all of the Company's Common Stock issued to
it and on March 6, 1998 the Company paid $86,000 in cash to Rall-Folks in full
settlement of all obligations of the Company to Rall-Folks. NTDT has also
completed the sale of all of the Company's Common Stock issued to it pursuant to
the terms of it's Note re-purchase agreement with the Company. The Company owes
approximately $57,000 to NTDT in accrued interest and to cover the deficiency
pursuant to the price protection provisions of it's Note re-purchase agreement
with the Company. The Company intends to satisfy all of its obligations in
connection with the NTDT transactions prior to April 30, 1998. RDG has not yet
completed the sale of all of the Company's Common Stock issued to it in December
1997 and January 1998. Based upon the closing price of the Company's stock on
March 25, 1998, upon the issuance and sale of the remaining Common Stock
available to be issued to RDG pursuant to the registration statement, the
Company does not anticipate that any amounts required to be paid to satisfy it's
obligations to RDG under it's Note re-purchase agreement will have a material
financial impact to the Company.
The Company currently does not have significant development
plans for additional Company Restaurants during fiscal 1998.
On December 18, 1997, Rally's Hamburgers, Inc. a Delaware
corporation ("Rally's") acquired approximately 19.1 million shares of the common
stock, $.001 par value per share of the Company, pursuant to that certain
Exchange Agreement, dated as of December 8, 1997 (the "Exchange